Labor‐Technology Substitution: Implications for Asset Pricing

Miao Ben Zhang

Journal of Finance, 2019, vol. 74, issue 4, 1793-1839

Abstract: This paper studies the asset pricing implications of a firm's opportunities to replace routine‐task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine‐task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment‐level occupational data, I construct a measure of firms' share of routine‐task labor. Compared to their industry peers, firms with a higher share of routine‐task labor (i) invest more in machines and reduce more routine‐task labor during economic downturns, and (ii) have lower expected stock returns.

Date: 2019
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